The Effects of Non-Executive Directors and Board Shareholdings On the Relation between Chief Executive Compensation and Firm Performance (2014)

This dissertation examines the effect of non-executive directors and board shareholdings on the link between CEO pay and performance employing a unique data set of 200 UK Stock exchange firms from the FTSE All Share Index for the years 2002 and 2006 i.e. pre and post Higgs (2003) report. It includes both cash (salary and bonus) and equity-based (stock options and long-term incentive plans) components of CEO compensation in the analysis of a dynamic CEO compensation model.

Different from previous studies, it uses GMM-system estimation method, which controls for the presence of unobserved firm-specific effects and for the endogeneity of explanatory variables. In addition, it controls for a comprehensive set of corporate governance variables. The empirical results indicate that there is a positive and significant relationship between firm performance and the level of CEO cash compensation while the relationship is positive but not significant for total compensation.

It also finds that proportion of non-executive directors on board does not have a significant impact on CEO cash compensation, while non-executive directors’ share ownership has a nonlinear and significant impact suggesting that ownership can provide incentives for non-executive directors to be more active in monitoring for CEO compensation packages. The results also indicate that institutional ownership has a positive and significant influence on CEO pay-for-performance sensitivity of option grants.

It finds that longer CEO tenure is associated with lower pay-for-performance sensitivity of option grants suggesting the entrenchment effect of CEO tenure. Finally, it recommends changes to be brought in the present systems of remuneration and shareholders activities.

  • 13,000 words – 78 pages in length
  • Excellent use of literature
  • Excellent analysis of subject area
  • Well written throughout
  • Ideal for finance students

1 – Introduction
Historical view

2 – Literature Review
Agency theory
Shareholder’s “say on pay”
CEO compensation
Non- executive directors
Board shareholdings
FTSE All share index companies

3 – UK Remuneration and Corporate Governance Code
CEO compensation – a general perspective
CEO compensation in UK
Higgs report

4 – Summary and Rationale for Research

5 – CEO Compensation and Firm Performance Dependence on NEDs and Board Shareholdings
How directors are paid
Analysis of CEO pay-performance measure pre and post Higgs report (2003)
Control variables

6 – Model Specification and Estimation
Corporate governance mechanism and CEO compensation level
Corporate governance mechanism and pay-for performance sensitivity of stock options

7 – Data and Sample Characteristics
Sample size
Descriptive statistics

8 – Regression Results: Firm Performance and CEO Compensation
Firm performance, Corporate Governance and CEO cash compensation
Firm performance, Corporate Governance and total CEO compensation
CEO pay-for-performance sensitivity of option grants

9 – Conclusions

10 – Recommendations
Improving Transparency
Role of shareholders
Role of remuneration committees
Structure of remuneration
Promoting good practice


Non-Executive Directors and Board Shareholdings Dissertation
Non-Executive Directors and Board Shareholdings Dissertation

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